Institutional investors allocate considerable shares of their portfolios to real estate, primarily in anticipation of diversification benefits. According to a recent study by the EDHEC Risk and Asset Management Research Centre, institutional investors would like to use index-based products for this purpose; however, real estate indexing has proven challenging. It has been challenging largely because real estate features such characteristics—rarely found in other asset classes—as high unit values and indivisibility, limited liquidity, great heterogeneity; active property management is also required. As a consequence,
existing indices based on direct or indirect investment have several drawbacks.
Indices based on direct investment are generally not investable and rely on subjective appraisals, so they show smoothed and lagged returns and the
transparency of their components is wanting. Indirect investment indices usually
rely on listed real estate investment vehicles and consequently have great exposure to equity market risk.

The EDHEC IEIF Commercial Property (France) Index addresses these issues by
using unlisted property funds under the French SCPI scheme as the index underlying, given a certain liquidity threshold. The index has very attractive diversification properties and is representative of the real estate market; at the same time it is fully transparent and investable and has little exposure to financial market risk. These characteristics make the EDHEC IEIF Commercial Property (France) Index an interesting underlying for index-based products that could satisfy the demands of institutional investors.